USD/INR gathers strength ahead of US NFP release
- The Indian Rupee loses traction in Friday’s early European session.
- Persistent outflows from local stocks and expectations of RBI rate cuts undermine the INR.
- The February US Nonfarm Payrolls report on Friday will be closely watched.
The Indian Rupee (INR) trades on a softer note on Friday. Persistent outflows by Foreign Institutional Investors (FII) exert some selling pressure on the local currency. The rising expectation that the Reserve Bank of India (RBI) will cut its interest rates further is likely to contribute to the INR’s downside.
On the other hand, a fall in crude oil prices might provide some respite for the INR as India is the world's third-largest oil consumer. Foreign exchange intervention from the Indian central bank might prevent the INR from significantly depreciating.
Traders brace for the US February employment report on Friday, including Nonfarm Payrolls (NFP), Unemployment Rate and Average Hourly Earnings. This report could offer some hints about the economic health of the world's biggest economy and gauge the interest rate trajectory.
Indian Rupee softens amid the global market volatility sparked by Trump's tariffs
- RBI said on Wednesday it will infuse $21 billion in Rupee liquidity into the banking system in a bid to ease lending conditions and boost economic growth.
- Trump issued an executive order earlier in the day exempting goods from both Canada and Mexico under a North American trade agreement, known as USMCA, for a month from the 25% tariffs that he imposed earlier this week.
- US Initial Jobless Claims for the week ending March 1 dropped to 221K, compared to 242K in the previous week, according to the US Department of Labor (DOL) on Thursday. This figure came in below the market consensus of 235K.
- Continuing Jobless Claims for the week ending February 22 went up by 42K to reach 1.897M, compared to 1.855M (revised from 1.862M) in the previous week.
- Atlanta Fed President Raphael Bostic said late Thursday that The US economy is in incredible flux and it’s hard to know where things will land.
- Economists predict that 160,000 jobs will be added, and the unemployment rate will hold steady at 4.0%. Average Hourly Earnings are expected to rise by 0.3% compared to the previous month.
USD/INR maintains its constructive bias despite consolidation in the near term
The Indian Rupee trades weaker on the day. The bullish outlook of the USD/INR pair remains intact, characterized by the price holding above the key 100-day Exponential Moving Average (EMA) on the daily timeframe. However, the 14-day Relative Strength Index (RSI) hovers around the midline near 50.0, suggesting that further consolidation cannot be ruled out in the near term.
The first upside barrier for USD/INR is located at 87.53, the high of February 28. Sustained trading above the mentioned level could see a rally to an all-time high near 88.00 before 88.50.
On the downside, the low of February 21 at 86.48 acts as an initial support level for the pair. Further south, the next contention level to watch is 86.14, the low of January 27, followed by 85.60, the low of January 6.
Indian Rupee FAQs
The Indian Rupee (INR) is one of the most sensitive currencies to external factors. The price of Crude Oil (the country is highly dependent on imported Oil), the value of the US Dollar – most trade is conducted in USD – and the level of foreign investment, are all influential. Direct intervention by the Reserve Bank of India (RBI) in FX markets to keep the exchange rate stable, as well as the level of interest rates set by the RBI, are further major influencing factors on the Rupee.
The Reserve Bank of India (RBI) actively intervenes in forex markets to maintain a stable exchange rate, to help facilitate trade. In addition, the RBI tries to maintain the inflation rate at its 4% target by adjusting interest rates. Higher interest rates usually strengthen the Rupee. This is due to the role of the ‘carry trade’ in which investors borrow in countries with lower interest rates so as to place their money in countries’ offering relatively higher interest rates and profit from the difference.
Macroeconomic factors that influence the value of the Rupee include inflation, interest rates, the economic growth rate (GDP), the balance of trade, and inflows from foreign investment. A higher growth rate can lead to more overseas investment, pushing up demand for the Rupee. A less negative balance of trade will eventually lead to a stronger Rupee. Higher interest rates, especially real rates (interest rates less inflation) are also positive for the Rupee. A risk-on environment can lead to greater inflows of Foreign Direct and Indirect Investment (FDI and FII), which also benefit the Rupee.
Higher inflation, particularly, if it is comparatively higher than India’s peers, is generally negative for the currency as it reflects devaluation through oversupply. Inflation also increases the cost of exports, leading to more Rupees being sold to purchase foreign imports, which is Rupee-negative. At the same time, higher inflation usually leads to the Reserve Bank of India (RBI) raising interest rates and this can be positive for the Rupee, due to increased demand from international investors. The opposite effect is true of lower inflation.
Author
Lallalit Srijandorn
FXStreet
Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.
